Trade Schools and Student Loans – Double Trouble?

An article appeared recently in the New York Times which discussed how many for-profit trade schools are doing very well in these difficult times. It seems, however, that their students don’t always fare so well. Federally backed student loans are used to pay for this training over 80% of the time, and many students cannot afford the debt load when it comes time to repay them.Many of these trade schools advertise frequently on television and subsequently have become household names. Some examples are the University of Phoenix, ITT Technical College and the Cordon Bleu cooking school among many others. It is not unusual for these for-profit schools to be billion dollar per year enterprises. The fees they charge can be substantial, sometimes surpassing $40,000 for a two year program in some cases.These trade schools have been booming lately because of the recession. People see that business is down and that the future does not look brilliant for many, and they think that the only way to get ahead and lead a decent lifestyle in the future is to get training and a good paying job. The problem is that they are letting themselves be misled in a lot of cases. They do this by listening to the recruiters for these schools who tell them it is likely they will be placed into a job through industry connections the school has developed. They also are led to believe that they can expect a certain level of salary upon graduation, and this often turns out to be totally unrealistic. Of course these figures are never put in writing and are not guarantees, but people tend to latch onto these dreams and find themselves in trouble when they don’t earn nearly the salary they were expecting and cannot afford the student loan payments after finishing trade school.It is an axiom of student loan borrowing that a person should only borrow in total as much as his/her first year of salary is expected to be- beyond that the debt burden will be too high. If someone were to borrow $40,000 for a two year trade school program, this will lead to payments of $460 per month for a ten year payoff period. Another axiom is that student loan installment payments should not exceed 10% of a person’s monthly earnings. So someone would have to start out earning about $55,000 per year to afford that level of student loan debt. There aren’t that many jobs paying $55,000 to fresh-out trade school graduates.Worse than that the former students are often facing underemployment and jobs paying close to the minimum wage, if they get hired at all. It is not unusual for people who graduate from cooking schools to get jobs bussing tables or washing dishes rather than being the glorious chef they expected to be, for example.The trade schools are doing very well, however. In fact in many cases they have begun to offer student loans themselves. As stated previously, these schools average well over 80% of revenue coming from student loans. So why would they lend additional funds, in fact their own money, to students? A lot of this loan money ends up being written off as bad debt, so what is going on? The answer is that there is a requirement when taking out federal student loans that at least 10% of the cost of schooling be paid either by the student or from other private sources. So the trade schools step in and lend money to students to meet these requirements. Their business that is funded by federal student loans is so good that write-offs on the money they lend to students themselves are worth it.It could be worse. There are many trade schools out there that are not well established household names like the companies cited above. There are lots of smaller, unaccredited schools. Sometimes these schools just close up and students are left holding the bag. And that bag is a heavy one because these kinds of schools, being non-accredited, are not sanctioned by federal student programs, so private student loans are required if the student needs to borrow money, which is the case most of the time. Private student loans have much higher interest rates and far less protection for borrowers than do federal loans. So the student is left with a heavy loan burden and no job credentials from the trade school that he can use to find employment and pay off the student loan debt. There are more and more reports of trade schools declaring bankruptcy and closing in one location and then opening up shop and starting again somewhere else under a different name and organizational structure.

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